SLXX - should I sell?

Today I'm going to look at whether SLXX still deserves a place in my portfolio, or whether I should sell. I've held them for almost a year, and in that time I've earned a capital gain of 20% and 7% of dividends. Pretty good, huh? Well, actually no. In that time the FTSE is up over 50% before dividends. On the other hand, if I'd kept the money in cash I would have earned less than 2%, and at least SLXX did better than that.

Yield
Right now SLXX has a yield to maturity of 5.6%. Its Macauley Duration is 8.7 years. How much of a risk premium is built into that yield? IGLT holds UK government gilts - it has a yield to maturity of 3.3% and a Macauley duration of 8.3 years. We can consider that the risk free rate, and the durations are close enough to afford a direct comparison. The risk premium in SLXX is therefore 2.3%.

Is 2.3% a reasonable figure? To work that out we need to know the default risk of the bonds making up the ETF. That is unknowable, but we do have the ratings. Here's how the holdings break down:
Aaa -- 5%
Aa1/2/3 -- 26%
A1/2/3 -- 42%
Baa1/2/3 -- 27%
Ba1 -- 2%

So they're grouped fairly evenly around a central rating of A2. That is defined as "Safe investment, unless unforeseen events should occur in the economy at large or in that particular field of business". Not super-helpful. Moody's historical default rates for bonds rated A2 is about 0.4%, according to this paper. The economy is in a pretty dire state, so we could legitimately assume the actual default rate could be higher than 0.4% for a few years. Call it 0.8% for safety.

That suggests that holders of SLXX are being rewarded with an extra 1.5% of yield, over and above the expected default rate. That seems a little on the high side, but it is never going to reduce to zero.

This chart suggests a long-term average yield premium for AA corporate bonds over US gilts is about 1%, and for BBB bonds it is about 2%. So for A2 bonds ou might expect a normal yield premium of 1.5%, and a best-case of about 1%.

According to wikipedia a decrease in yield of 1% will increase the value of a bond by its Macauley duration. So if the 2.3% yield premium on SLXX decreased to 1.3%, its price might increase by about 8-9%. If we assume it takes 2 years for that to be achieved, then the total return on SLXX will be about 10% per year (5.6% of interest/dividends, and 4-4.5% of capital growth).

Currency
If I was planning to live in the UK indefinitely, then I would probably hold onto SLXX. But I'm not - I'm expecting to move to Norway within the next year. 43% of my shares are linked to the pound to a large extent - they are either UK companies with most of their revenue in sterling, or UK bonds. In addition, I have a house, and some cash, and a mortgage.

The net of that is that about two-thirds of my net wealth is tied up in sterling. That's a long way from the ideal - I'm facing significant currency risk. SLXX is not helping - but selling it and holding the cash will not help either, so I need to have a plan in mind for what to switch into before I sell.

Conclusion
I'm content that SLXX is worth holding for its expected return, but it's not giving me the international diversification that I require. I will start looking for an alternative to switch into.